With government playing a bigger role in the economy, it's hard to keep track of all the changes affecting our personal financial lives. The flagging economy has lead to a barrage of questions. Are public sector employee pensions safe? With inflation so low, do savings bonds make sense now? And what about reverse mortgages, are they a smart move now that new rules are in place? AP personal finance writers tackle those questions in this installment of "Your Money." If you have a question you want answered, e-mail it to yourmoney(at)ap.org.
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Q: When a pension goes bankrupt, I know there's a government guarantee on the obligations. How about when a government entity runs out of money, however, as my state and city are starting to do? If they can't fund their obligations, does someone else step in to pick up the check?
A: For public sector workers, there's no pension backstop comparable to the Pension Benefit Guaranty Corp., the federal agency that steps in when private plans can't meet obligations. Public pension sponsors — say, state or city governments — have contractual obligations to keep pensions fully funded.
That may be of little comfort when many local and state governments are stretched thin, such as California, which is struggling to close a $26 billion deficit. However, public pensions have a stellar record. Robert Klausner, a pension law attorney and counsel to the National Conference on Public Employee Retirement Systems, said he's unaware of any public pension failing to meet its obligations since the 1930s. In the case of Orange County, California's bankruptcy in 1994, retirees received full pension benefits throughout the financial crisis, Klausner said.
Public pensions have proved more durable than private plans in part because governments have the flexibility to make up for pension shortfalls by raising taxes — an option corporate pension sponsors lack. Klausner also said independent actuaries review the nation's 2,700 public pension plans to ensure they can meet obligations. In instances when a government failed to contribute enough to keep a pension fund healthy, legal challenges have succeeded in restoring full funding, Klausner said.
— Mark Jewell
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Q: Do savings bonds make more or less sense in an economy like this one, where interest rates and inflation are low? What about when inflation rises?
A: Savings bonds make sense for the investor who doesn't need much cash flow and wants safety. But they're not particularly attractive right now if you're looking to make a savvy investment for the long term.
A Series EE bond purchased between now and the end of October earns just 0.7 percent per year for as long as you hold it. The exception would be if you hold the bond for 20 years, in which case the value is guaranteed to double. In that instance you'd be assured a return of 3.5 percent. But if you're investing for that long a timeframe, you should probably aim higher.
You could also purchase Series I savings bonds, which have some inflation protection. But if you buy one now you'll earn nothing for inflation for as long as you hold the bond, due to the fact the inflation rate is currently below zero. This will be a better investment as inflation rises.
Depending on your time horizon, other alternatives to consider are high-yield savings accounts, CDs or Treasury Inflation Protected Securities (TIPS), advises Greg McBride of bankrate.com.
— Dave Carpenter
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Q: I understand there were some changes in the reverse mortgage program recently. What were they and who do they help?
A: As part of stimulus legislation signed by President Obama in February, the loan limit on reverse mortgages was temporarily raised to $625,500 from $417,000, subject to renewal by Congress at the end of the year. That helps senior homeowners (reverse mortgages are for homeowners age 62 and older) who have homes with higher values.
Under other changes in the past year, reverse mortgages can now be used on a condominium and, for the first time, to purchase a new home.
Eric Bachman, founder of Oakland, Calif.-based Golden Gateway Financial, says the changes make reverse mortgages even more compelling for older Americans interested in downsizing or moving to another location. It also means, he says, that seniors in financial distress or those simply planning ahead can put more of their home equity to work for them because of the higher loan limits.
Some other changes this year aren't perceived as so consumer-friendly.
Fannie Mae, the government-backed mortgage company, made changes in April that allow for higher margins for reverse mortgage lenders. Margins are the interest rate spreads a lender makes on the loan, so higher margins mean higher interest rates. Also, the margin can change from the time a borrower submits an application and the loan is funded, which can be up to 120 days.
— Dave Carpenter
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